Lowering the Marginal Corporate Tax Rate: Why the Debate? |
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| Authors: | Nikolay Anguelov |
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| Institution: | 1. Assistant Professor of Public Policy, University of Massachusetts, Dartmouth. Email: . The author is grateful to the Amartya Sen Prize committee for selecting an earlier version of this paper as the co‐winner of the 2015 2. second annual competition, arranged by the Global Justice Program at Yale University in partnership with Global Financial Integrity and Academics Stand Against Poverty. |
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| Abstract: | In an effort to attract new investors and retain existing producers, governments use corporate tax rates as a policy tool for industrial recruitment, resulting in inter‐state tax competition. Foreign direct investment (FDI) growth and GDP growth are the two policy outcomes gauged in inter‐state tax competition. The assumption is that lower corporate taxes lead to increases in FDI, which results in capital formation that generates GDP growth. This 60‐nation panel study tests that assumption through examining economic indicators contingent on taxation, such as FDI and mergers and acquisitions among multinational corporations between 1999 and 2009. The results suggest that reduced corporate tax rates can increase FDI but decrease annual GDP growth. The main policy implication is that tax competition may attract investment, but may not promote overall economic growth, offering support for value‐extraction theories. |
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| Keywords: | corporate tax foreign direct investment GDP multinational corporation |
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